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Blog :: 12-2011

The Commission Model's Role in Our Financial Crisis

It has been well documented that our current financial problems and recent financial crisis were the result of the bursting of the housing bubble. Investment banks and others sold bundled mortgaged backed securities and insurance against defaults on the those securities based upon the premise that housing prices would always appreciate. Even Ben Bernake when pressed on the downside risk of the derivatives market said, prior to the financial meltdown, that it was unlikely that housing prices would decline in any serious or prolonged way and thus the risks of the housing bubble bursting were minor.

Books such as the "Big Short" and movies such as the "Inside Job" have done a wonderful job documenting how Wall Street investment banks and regulators were to blame for our current financial problems and recent financial meltdown.

Additionally, we all have heard stories of mortgage brokers who unscrupulously encouraged homebuyers to borrow more money than they could afford. We also have heard stories of how appraisers worked in cahoots with mortgage lenders to ensure that high risk borrowers were able to obtain financing based simply upon the equity of the house. For some reason, however, we have heard very little about real estate agents that encouraged homebuyers to buy more expensive homes than they could afford.

A large majority of real estate agents are paid a commission based upon the price of the home their client purchases. If their client purchases a higher priced home they get paid more.

There is an inherent conflict of interest in this model. The agent's fiduciary obligation is to look out for the best interests of the buyer. In almost every case, it will be in the best interest of the buyer to pay less for a home. In contrast, it is in the best interest of their agent for the buyer to pay more for the home.

With this inherent conflict of interest as the backdrop, buyer agents were out in force encouraging homebuyers to purchase expensive homes during the housing bubble. They, like Ben Bernake, never pointed out the downside risk to their clients. They never warned their clients that if the bubble were to burst, they could suffer financial harm.

Had the majority of real estate agents not been paid based upon the price of the home and rather by some other measure, then it is possible that some of the damage could have been avoided. At the very least, real estate agents and the real estate brokerage industry may have been heeding warnings to the public rather than engaging in the same reckless behavior as the investment banks and others that created our current financial mess.

This is the sort of revolutionary thinking that happens at Flat Fee. By working on a non-commission based systemyou can be assured we will give you the best quality real estate work for a pre-discussed amount. If you have more questions about how Flat Fee works, or our business model, contact us here.

Monopolies and Lobbyists

Have you ever wondered how the oil industry has been able to maintain its monopoly of selling gasoline in the United States when advances in technology have led to cheaper and more efficient alternatives? Not only are the alternatives cheaper and more efficient, the overwhelming majority of Americans support these alternatives because they have grown sick of being forced to use only one form of fuel for decade after decade.

Despite overwhelming support for cheaper and more efficient alternatives, oil companies have been making greater profits than ever before thanks in large part to the rises in gasoline prices. You would have thought that with cheaper and more efficient alternatives available that the prices would have come down rather than go up. In my opinion only one thing can explain this continued dominance, it is efforts by oil industry lobbyists to intimidate the competition and discredit their alternative models.

It is unfortunate in this Country that there are business groups that still support monopolies such as the one that the oil industry continues to maintain. Instead of lobbying for policies that protect their monopoly, the oil lobbyists should explain to the American people why oil is better than the alternative models. Unfortunately, the oil lobbyists cannot do that because they know the alternatives are better and that the public desires the alternative fuels more than oil.

Because they cannot convince the public that oil is better, they instead focus on efforts to discredit the alternative forms of energy. For instance, for years the technology has been available to have hydrogen fueled cars. Despite public demand, efforts have been slow to develop and provide this technology to the public in part because the oil industry has engaged in a campaign to discredit hydrogen fuel. The oil industry has created the perception that hydrogen fuel is volatile and thus unsafe for the public. In essence, the oil industry has portrayed itself as the proven historic safer model.

I believe that any group that must rely upon lobbyists to discredit the competition should be ashamed of themselves. Instilling fear and discrediting cheaper and more efficient models offends the principles of our American economic model. America has progressed thanks to healthy business competition and if groups are allowed to stifle that competition, it will harm our economy and our ability to improve as a Country.

At Flat Fee, we think outside the typical realty box. We are about our community and the environment in which we live. If you want a sociallyconsciousrealtor, contact Flat Fee.

Substance vs. Style

There was a day where a real estate agent would distinguish the quality of their services based upon their knowledge and experience in real estate transactions.

Today most agents no longer even attempt to distinguish their services upon substance. Instead they rely upon style to try to win over clients.

While there are many agents who do not fit the stereotype, I would venture to say that a majority of real estate agents fit the public's stereotypical image of one. It is a person in an expensive suit driving a luxury car with vanity plates that read "Realtr" or "Mony". It is a person with an enormous ego who brags about themselves. It is a person who is overly chatty. It is a person that acts like you are now their new best friend from the moment that they meet you.

Essentially real estate agent marketing has become much like a campaign for Prom King or Prom Queen. The agent is the "cool kid" who pretends to befriend the kids whom they believe are "less cool" just in order to win their vote. They pretend to provide real companionship and advice but the companionship and advice is hollow. It is intended simply to keep their vote until the Prom is over and once it is, they go back to being relative strangers.

The real question is: why do real estate agents feel the need to market their image rather than their knowledge, experience and quality of advice? The answer is simple, a vast majority of real estate agents have little substance beneath the style of their facade.

Instead of relying upon their own knowledge and experience, most real estate agents now rely upon computer programs, form documents and other professionals to provide the advice and counsel historically provided by agents. Here are some examples:

Price Analysis - In years past, agents used to pour over recent sales and comparable active listings to provide clients with advice regarding the estimated fair market value of a home. Instead of looking critically for themselves today, most agents now simply rely upon a computer to tell them the estimated fair market value. While this approach often results in faulty or unrealistic estimates, it is significantly quicker for an agent than pulling the data themselves and critically analyzing it.

Paperwork - Not too long ago, real estate agents had to generate their own paperwork for clients. As a result, they needed a keen understanding of the documents and their various provisions. Agents needed to explain the implication of each provision. Today, most agents simply utilize forms created by the Realtors Association or their office manager. Most have little to no understanding of the various provisions or the implication of those provisions for their clients. The forms are accessed via computer programs that simply require the agent to fill in the blank or check boxes. If pressed on all provisions in the documents, most agents cannot provide knowledgeable answers. Thus, the agent simply becomes a paper processor rather than an adviser to the client.

Knowledge About the Process - Most agents have never taken the time to learn how the process of buying and selling has developed over the years. Most agents today are simply provided a checklist by their office manager and go through the steps on their checklist. If a buyer or seller questions the agent about the history of the checklist item or why it is required most cannot answer. A perfect example of this in Vermont is when agents involved in the sale of a condominium unit request a copy of "Smoke Certificate". Had agents taken the time to understand and learn about the process, these agents would know that under Vermont law a "Smoke Certificate" it is not required for the sale of a condominium. Despite this fact, agents request it because it is on their checklist.

Advice of Other Professionals - Most agents today simply defer to answers and opinions provided by others during a transaction without ever asking critical questions of the professional that might benefit the client. For instance, almost every transaction involves a property inspection. Because of their cautious nature, most property inspectors will raise issues with the property. In many cases, the property inspector will make mistakes or improperly characterize an issue that causes a buyer to worry. Instead of questioning the inspector, most agents will simply take the inspector at his or her word. In some cases, this will lead to the buyer prematurely terminating the contract unnecessarily. At a minimum agents should be able to understand the advice being provided from other professionals and question the other professional if they believe the professional has made a mistake.

These are just a few of the many examples of why agents rely so heavily upon their style and not their substance. I believe it is time for the public to demand that agents start providing substance and do away with their phony stylistic facades. The agents of Flat Fee know the importance of substance. If you want an agent that will give you the information you need to make an informed decision, contact us .

"My Way or The Highway"

It always amazes me when someone says to me, "well, that is not the way we do it here." The implication, of course, is that their way is correct and my way is incorrect.

While I can respect a person who believes their method is the correct way, people who say, "well, that is not the way we do it here" typically do not respect any other point of view or methodology for doing something.They are basically saying, "it is my way or the highway."

If people never challenged conventional thinking or methodologies then there would never be any progress.It is important to always look to see if there are more efficient or effective methods for doing something.That is how progress occurs.

The real estate industry, more than most, seems to be filled with individuals who take the "my way or the highway approach.As a result, the industry seems to cater less to what the public wants and more to what they think is best.

If the "my way or the highway folks put aside their ego for a moment and listened to the public they would hear that some of the conventional thinking is outdated and that the public wants better methodologies implemented.Here are some examples:

1. Compensation - The public is tired of the 6% conventional compensation model. They think that real estate agents are overcompensated for the services provided. They believe that advances in technology should have led to a reduction in the conventional rate.The public wants the industry to develop a more equitable compensation model that rewards the services provided based upon the time spent by the agent providing advice, not based upon the ultimate sales price of the home.

2. Scheduling Appointments - Sellers do not want to receive calls from other real estate agents regarding scheduling showings of their homes. Sellers believe that one of the duties of their agent is to be an intermediary for them and to coordinate the scheduling of all showings.They believe agents who do not provide scheduling coordination are lazy.Despite this perception, firms continue utilizing this methodology.

3. Assisted Showings - Buyers that hire their own agent for buyer representation do not want seller agents present during a showing.When you speak to buyers after a showing where the seller's agent was present, an overwhelming majority say that the seller's agent made them feel uncomfortable.In thebuyers opinion, they hired their own agent so that they did not have to deal with the seller's agent. Again, the public believes that one of the roles of an agent is to be a true intermediary alleviating the need for them to work directly with the seller or the seller's agent.

4. Electronic Lockboxes - The public wants agents to utilize the most recent technology to ensure that access to their home is monitored to the best of the agent's ability.Many agents currently utilize electronic lockboxes which can only be opened by digitally encrypted keys.The keys and boxes create a permanent digital record so that the owner knows who accessed their home and when.Despite this technology being available, many agents in Vermont do not utilize it. In fact, because so many showings are done after regular business hours, many agents will leave the keys in an envelope at their office dropbox or at the property itself without ever seeing who is taking the keys.

5. Closing Coordinators - The public expects that if they are purchasing a property, their agent will be the primary contact throughout and that one of the duties of their agent will be to coordinate the closing.Instead of listening to the public, most firms have a "closing coordinator."These coordinators are typically salaried employees.In some cases they are paid per closing.In either event, if the firm did not utilize a third party closing coordinator then presumably they could charge the client less.Thus, not only does the public not want to have to communicate with a third party, but the methodology is inefficient from an economic standpoint as well.

6. Print Ads of Listings - The public does not want to see print ads of listings anymore. In our environmentally conscious society and given the fact that all buyers are looking online these days, the public views print ads of listings as a waste of paper and resources. The public would much prefer that firms utilize the internet and spend resources there rather than waste paper.

7. Pictures on Business Cards - Only would an industry run by "my way or the highway folks still believe that a picture on a business card is a good idea.I cannot think of any other industry where people still include a picture of themselves on their card.I don't think any business card designer today would suggest putting a picture on your card primarily because the public does not want to see pictures on business cards.

8. Luxury Cars and Vanity Plates - More than any other industry, in real estate there is a perceived need to drive the most expensive car possible.In many cases, agents cannot afford to drive a luxury car but do so anyway.The theory is that the public will equate an agent's track record for successful transactions with the type of car being driven.There also seems to be a theory that a vanity plate on the luxury car adds to that perception.In this day and age, the public does not want their agent to drive a car they cannot afford.The public wants agents to be themselves and drive the car that is right for them.The public is very good at picking up on facades and when they do the person putting up the facade loses credibility.

9.Buying Listings - There is a practice in the real estate industry known as "buying listings."This is the practice where an agent will tell a seller that their home is worth more than it is simply to secure the listing.The agent will overprice the home initially to get the listing and then when it does not sell, the agent convinces the seller to reduce the price.While this practice is unethical, it happens more than anyone likes to admit.The problem with the practice is that it not only does a disservice to the particular seller, it does a disservice to the public.It hampers the ability of the public to get a sense of the true market value of properties.

10.Commission Outside the Transaction - The real estate industry is peculiar in many ways, but one in particular is that its participants view their compensation as somehow distinct and separate from the transaction in which they participate.For instance, say that a buyer offers a seller $196,000 for their home. And let's say the seller won't sell for less than $198,000.Assume for a moment the seller's agent is the only agent involved in the transaction and stands to make a 6% commission should the parties come to an agreement and the sale occurs.Instead of reducing their commission from $11,760 to $9,760, the agent will risk losing the sale by telling the buyer they need to increase their offer to $198,000.If the buyer refuses, the agent will let the deal die rather than giving up $2,000.From the public's perspective the commission is integral to the transaction.It is the largest transactional fee to either side and it has the potential to bring deals together.

At Flat Fee, we do things differently. We work with you to meet your real estate needs. We want what's best for you. We're here to change the way people think of real estate. If you're ready for a forward thinking real estate company, contact us.

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